Question: 3. Consider the VAR(1): [ Xt 0.4 0.3 Xt-1 E1,t Yt 0.8 0.6 Yt-1 E2,t where {} is a vector white noise process. (a)

3. Consider the VAR(1): [ Xt 0.4 0.3 Xt-1 E1,t Yt 0.8

3. Consider the VAR(1): [ Xt 0.4 0.3 Xt-1 E1,t Yt 0.8 0.6 Yt-1 E2,t where {} is a vector white noise process. (a) How can you verify that xt and yt are cointegrated? (b) Write this model in error correction form. (c) Compute the speed of adjustment coefficient a and the cointegrating vector where the 3 on x is normalized to 1.

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